SA economy contracts, on track for recession

PRETORIA - South Africa's economy contracted more than expected in the first quarter of the year, data showed on Wednesday, putting it on track for its first recession in seven years.

The data weakened the rand against the dollar until the local currency took strength from news that Fitch had affirmed South Africa's investment grade credit rating.

Statistics South Africa said economic output fell by 1.2 percent in the first quarter of 2016 after rising by a revised 0.4 percent in the three months to December, mainly due to an 18-percent slide in the mining sector during the quarter.

Mining contributes nearly eight percent to GDP but has been hit by weak commodity prices. Agriculture, which accounts for 2.2 percent of GDP, also fell 6.5 percent, reflecting the impact of a crippling drought across southern Africa.

The economy shrank by 0.2 percent on an unadjusted year-on-year basis in the first quarter, compared with 0.6 percent growth in the previous three months, the agency said.

Economists polled by Reuters had expected a quarter-on-quarter GDP contraction of 0.1 percent while the economy was seen expanding 0.1 percent year-on-year.

"Today's figures paint a very bleak picture of the health of Africa's most developed economy ... and there is little optimism that things will turn around anytime soon," Capital Economics analyst John Ashbourne said. "We expect that South Africa's credit rating will be cut eventually."

The central bank forecasts growth at 0.6 percent this year, which inhibits its scope to raise interests to tame rising inflation stoked by a weaker rand and rising food prices.

NKC African Economics analyst Hanns Spangenberg said the GDP contraction was much larger than expected, saying that it "looks like we are in danger of a possible recession this year".

The central bank has hiked rates by a cumulative 200 basis points since 2014 to bring inflation within its target band of 3 and 6 percent. Inflation stood at 6.2 percent in April.

Analysts however see little scope for further tightening as growth struggles. In addition, raising interest rates could alienate the ruling African National Congress's supporters before local governments elections in August, where the party is expected to face a stiff challenge by the opposition.

Critics blame President Jacob Zuma for the economic malaise, demanding that he resign for changing finance minister twice in one week in December, triggering market turmoil. Zuma has however held on with the backing of his ruling party.